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Automation of the $220 trillion (â¬167 trillion) over-the-counter derivatives industry dominated discussions in Barcelona this month. Delegates at the International Swaps and Derivatives Association annual meeting expounded on the advances made by the industry, with Isda providing numerous statistics to back claims that improvements have been widespread.

Isda’s estimates of the industry’s growth showed global credit derivatives volumes had soared by 55% in the second half of 2004 to a record $8.42 trillion – more than twice the equivalent volume for 2003. The notional value of interest rate derivatives outstanding grew by 29% to $184 trillion and equity derivatives increased by a fifth to $4.15 trillion.

Isda was able to pride itself on the drive towards automation. One survey showed a fifth of plain vanilla swaps and a third of credit derivatives deals are being confirmed on an automated basis, compared with 13% and 6% a year ago.

The use of collateral in privately negotiated derivatives transactions grew significantly over the previous 12 months and the amount of pledged collateral in circulation is estimated by Isda at $1.2 trillion – a 20% increase over 2004.

The association claimed the findings illustrate just how seriously the industry has taken its calls to reduce the operational and credit risks associated with OTC trading.

However, the headline figures, while commendable, are not enough to see off worries about parts of the industry. The UK Financial Services Authority wrote to institutions trading in credit derivatives last month, about the high level of unsigned confirmations outstanding between counterparties for credit derivatives.

The FSA said credit derivatives transactions sometimes remain unconfirmed for months as counterparties deliberate about the finer details of trades that have supposedly been closed. The FSA said it would demand improvements if they were not forthcoming.

To their credit, Isda spokespeople and bankers did not use the figures as an excuse for complacency. Jonathan Moulds, Bank of America’s new international head of global markets and Isda’s chairman, urged firms to move towards more efficient trade, confirmation and clearing processes and said the prospects for the business were “all about the future use of technology”.

Others, including some of the main proponents of electronic trading, such as David Gelber, chief operating officer of Icap, and Mark Brickell, chief executive of swap-trading platform Blackbird Holdings, reiterated the same views, albeit with a degree of self-interest.

The conference focused on a theme that is foremost in people’s minds and has been correctly placed at the top of Isda’s agenda. But automation – or the lack of it – is not the only danger presented by the industry.

While Isda met in Spain, another seminar was taking place in London, focusing on credit derivatives and their structured offspring – collateralised debt obligations. In London, there was a stronger focus on the investor side: speakers looked at the performance of the products being put together by derivatives specialists and were asked whether they are safe and whether there is sufficient understanding of them.

The widespread view – from the sellside, at least – has been a resounding “yes” to both questions, but at this seminar there were murmurings of disquiet. With products proliferating so quickly and increasing in complexity, the industry had to acknowledge that investors are failing to ensure they fully comprehend products’ structure and content before putting their money into them.

Gay Huey Evans, a director in the FSA’s markets division, made a similar point in Barcelona. She questioned whether investors might be basing investment decisions in structured credit investments only on ratings, saying both the structure and payout should be taken into equal consideration.

This echoed the concerns of the Joint Forum, a group of experts in banking, securities and insurance supervision, which reviewed credit risk transfer activity last year. It put out a paper listing areas the credit side of the derivatives industry must address.

This highlighted the need to confirm and document risk transfer transactions promptly after trades are agreed, the need for investor understanding of structures, their contents, the leverage involved and limits of public ratings.

Given the state of the credit markets – large numbers of new entrants and disquiet surrounding bubble-like conditions – these issues may be the most pressing.